Sinopec’s Spending a Concern, Moody’s Says, Stock Gains 2%

By Ben Levisohn

China has mandated its state-owned energy firms to help solve its pollution problem–and Shanghai Petrochemical (SHI), or Sinopec, has said it will spend–and borrow–to comply.

REUTERS

According to Bloomberg:

Sinopec will supply fuel that meets the China IV standard, which caps sulfur content at 50 ppm, from next year, the state- run China Central Television reported Feb. 1. The company will spend about 30 billion yuan ($4.8 billion) a year to upgrade its plants to produce the fuel, Chairman Fu Chengyu said in an interview with CCTV. The company will install upgraded desulfurization units at 12 refineries by the end of this year, he said.

The company said it would raise $3.1 billion by selling new shares of the company in Hong Kong, although the announcement–which should pushed the stocks lower because existing shareholders will now have a smaller claim on earnings–has actually jumped on the news. Shares have climbed 7% since the end of January.

Moody’s expects Sinopec to issue debt to meet its spending needs. In a report received today, Kai Hu and Cindy Yang write:

The increased capital spending of around RMB30-RMB40 billion will most likely be funded with debt; we expect the company’s internally generated operating cash flow will be insufficient to cover its capex in 2013-14. As a result, its gross debt and debt/EBITDA ratio could increase by 5%-7% by the end of 2014, all else being equal.

China also controls how much Sinopec can charge for its refined oil, and Hu and Yang worry that the government won’t allow it to pass the costs on to consumers. “Sinopec’s financial burden reflects its social responsibility role,” they say, “which is one of the most important considerations supporting its strategic importance to the Chinese government.”

We all know how well that’s gone for Petrobras (PBR), which occupies a similar position in Brazil. That stock has plunged 15% this year, in part, because the government won’t allow it to charge market-rate prices for its oil. China is a very different country than Brazil, however, and its government may do more to soften the blow.

Sinopec has gained 2.2% to $39.28 today. Petrobras has gained 0.9% to $16.65.

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FEBRUARY 7, 2013 11:47 A.M.

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APRIL 9, 2013 11:08 P.M.

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Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.